A Long Month

Well, we spent four weeks ... four long weeks ... talking about how to fix a business. At minimum, we talked an awful lot about measuring what is wrong and what to do about it.

When I speak with you, I frequently hear a common line of logic.

• "Your ideas are good, but our business is unique, and our business is special. It will take unique solutions to fix our special circumstances."

Let's assume that is true.

Who better to solve your unique and special challenges than you?

If your business is truly unique and special, then you, the individual who works at the unique and special business and knows it better than anybody else ... you are the person that can "fix it" ... right?

And YOU CAN FIX IT!!!!!

You have the tools. I've given you free tools for more than a decade. Use them! Or buy the booklet (click here). Who else in the industry has consistently given you free tools to fix your business every business day for more than a decade? So use them, please.

You have the Professional Knowledge of your area of expertise, right? Nobody knows more about merchandising at your company than you, or marketing, or analytics, or creative. Or maybe you are the CEO. You certainly know where you need to take your company, right?

You have the People Skills necessary to motivate people. It takes a lot of people to make change happen, and you have the skills to get people to do things that they typically don't have an interest in doing, all because it is what is best for your business.

You have Strategy Skills. You may have an advanced degree. If you do, put it to use, ok?! That's why you are being paid a credible salary.

In project after project, there's a consistent theme.

1. What We Do To Our Business > What Amazon Does To Our Business.
2. We are mis-managing our merchandise assortment.
3. We are not measuring how we are mis-managing our merchandise assortment.
4. This causes us to make marketing decisions that sub-optimize the future trajectory of our business.
5. We are not forecasting where our business is headed, so we aren't aware of the potholes we're about to hit.

At minimum, you can use the booklet or the free advice from this blog to figure out what is happening, right?

Or write me (kevinh@minethatdata.com) and we'll get busy solving problems. We can "fix it" together, right?

Ok, enjoy the long Holiday weekend. I'll join you on July 5 as we fix our problems this summer, so that we can impact Christmas and beyond. Who's with me??

We Control Our Future

Look at this story within a retail trade area. First, we have demand from existing items.

And here is demand from new items.

These are issues that Amazon doesn't influence ... and channel shift to e-commerce doesn't influence. Instead, these are issues caused by problems in both merchandising and marketing. 

We're blaming others for our own problems.

But there's a good side to all of this. We can fix our problems. We can "fix it"!! You are a highly talented professional paid to solve problems. Business problems. People problems. You can do this!

Apply The Techniques To Retail Trade Areas

The popular narrative is this.

• Amazon is destroying retail.
• E-Commerce is cannibalizing retail.
• Retail is doomed.

Nonsense.

Look at your own count of rolling twelve-month buyers within a retail trade area. Here's an example.

You cannot blame Amazon for what happened in Sep/Oct 2015 (the start of a long trend of negative performance). And you cannot blame e-commerce cannibalization, because if the customer shifts channels the customer is still counted in this image, right?

You can only blame yourself - it's the fault of marketing or merchandising or whatever.

The industry narrative is frequently wrong.

It's our job to figure out what we're doing wrong (and we do an awful lot wrong, me included). Then, once we know what is wrong, we can "fix it" ... and we're more than capable of fixing problems!

Setting A Subsequent Trajectory

Yesterday we talked about a business that was stuck.

If Management wanted this business to grow at a healthier rate, forecasted performance might look like this:

That's what 10% growth looks like, year-after-year-after-year.

New customers?

• This Year = 54,468.
• Next Year = 70,373.
• Two Years From Now = 80,885.
• Three Years From Now = 90,471.
• Four Years From Now = 100,003.
• Five Years From Now = 110,025.

First of all, do you have a forecasting algorithm to help you figure out what the future looks like?

Second of all, do you know how many new customers you need to make Management or Your Board happy?

Third of all, do you have a plan to find those new customers via a low-cost / no-cost customer acquisition program?

Put those three pieces together, and you've got something!

And you can do this - you can "fix it"!!

Seeing The Future

As I've mentioned previously ...

• "Forecasting is the sum of all knowledge possessed by the Professionals working for a company."

If your company is not actively forecasting future sales by product category and/or marketing channel, your company does not possess as much knowledge as competing companies possess.

Forecasting discipline allows you to identify future challenges and then mitigate them before the challenges become actual problems. Here's our business ... and the forecast isn't all that great, is it?

Build yourself a forecasting algorithm, and then as business results come in, adjust your perception of the future. Make changes. You don't have to be a victim of a bleak future ... fix it!!

New Items Need To Bubble Over And Find Their Way

I like to evaluate three categories of item performance.

• Winners / Sub-Divided into High Demand / High Units vs High Price vs Low Price.
• Contenders.
• Others.

Winners make up 5% - 10% of items and around 45% of annual demand.

Contenders make up 35% - 40% of items and around 45% of annual demand.

Others make up the rest - usually most of the items and less than 10% of annual demand.

This framework requires us to focus on the top of the assortment - the stuff that causes a business to be successful ... Winners and Contenders.

Look at this table, for the business we've analyzed for the past month.

Start by looking at the middle of the table, new items. Look at how many new items became winners? In the past year, just 2 new items made it to the top, compared to 7/5/4 in prior years.

Look in total ... only 52 winning items and 238 contenders last year ... compared to 67 winning items and 191 contenders the year prior.

The assortment is evolving ... fewer winners and more contenders. This company is trying more and more things to figure out a path to the future ... and is having less and less success.

As a marketer, you can help your merchandising team - feature their new/contending items in email campaigns and push those items toward success. You can help the merchandising team fix problems!! You can "fix it"!

Raising Prices

There's an odd dynamic happening across traditional companies ... old-school catalogers and traditional retailers.

Here's how it works.

1. It's too hard to compete in the "supply chain game" with modern brands.
2. Sales need to increase.
3. New items bear the brunt of price increases.
4. New items don't sell very well, because they are too expensive.
5. All items are discounted 40% to "move inventory".
6. This "de-values" the fair price of winning items, opposite of the goal of getting rid of poor-selling new items.
7. The p&l fails.
8. Repeat.

When you look at new items, run your "Class Of" report and measure average price per item sold. The table looks like this:

Here's the trend in new item prices.

• 3 Years Ago = $32.82.
• 2 Years Ago = $23.52.
• Last Year = $32.10.
• This Year = $42.16.

Now we know why productivity wasn't great in the past year ... prices increased significantly, driving down unit volume.

You might be ok with this ... but if you aren't ok with this, then you need to understand the ramifications so that you can fix your business, right? And you can do it - you have the talent. You can "fix it"!!

Oh - New Merchandise Is An Issue?

For the past month, I've been talking about an example of a company where new merchandise is causing challenges.

When I believe that new merchandise is a problem, I run what I call a "Class Of" report. I look at the year that a new item was introduced, and then I look at how well those items sold through subsequent years. If there is a new merchandise problem, it looks (at minimum) like this:

Look at new items introduced three years ago ... 53 styles generating $1.1 million in their "birth year".

Look at new items introduced two years ago ... 74 styles generating $1.6 million in their "birth year".

Look at new items introduced last year ... 152 styles generating $2.3 million in their "birth year".

Look at new items introduced this year ... 113 styles generating $1.5 million in their "birth year".

Last year, new styles doubled in quantity - demand increased by less than fifty percent. In other words, there was a significant increase in effort, and demand increased (which is good), but productivity went down.

Then this year the merchandising team cut way back on new styles, and productivity is nowhere near the level it was two years ago.

So there is a new merchandise problem - the company is clearly trying, but productivity is bad. The decline in styles and decline in demand explains why customer productivity did not meet expectations in the past year.

Marketing and Merchandising ... each of you have a chance to "fix it", don't you? Imagine what happens when you work together?

When Does The Customer Become Loyal?

In most cases, it takes a little bit of time before the customer becomes "loyal". Across 200+ projects in ten years, it has been my experience that "loyalty" seems to become a possibility once the customer has a 60% or greater chance of buying again in the next year.

This table is very typical ... it will take at least five purchases before the customer becomes loyal ... and the customer has less than a 10% chance of becoming loyal.

Now, if you know that the customer is unlikely to become loyal, what would you do?

1. Treat the small number of loyal buyers you have like royalty!
2. Work terribly hard in the 0-12 weeks after a purchase to get the customer to purchase again.
3. Find ways to generate profit on first purchases - so that you can get more first-time purchasers which yields more loyal buyers over time.

You can do this. You can follow the logic and make magic happen!

The Most Critical Time-Frame In Customer Development

If you read enough marketing content, you learn an awful lot about customer loyalty.

Now let's think about your business. When is the most critical time-frame in the development of your customer?

You probably leverage a technique from fifty years ago or more, called a "Life Table" ... and you know that it is the twelve weeks after a first purchase.

In the month (0) of a first purchase, the customer has a 3.51% chance of purchasing again (in our example).

In the first full month after a first purchase, the customer has a 3.86% chance of purchasing again if the customer has not already purchased for a second time.

And then ... the slow descent into oblivion happens ... 2.41% / 1.92% / 1.63% / 1.43% / 1.08% and so on ... with a brief seasonal blip on month 12 (1.69%).

I cannot think of a project where this dynamic didn't happen ... sure, the dynamic is elastic ... better response for some clients and worse response for others.

And I've shared this fact with you pretty much every year for ten years. Your marketing programs should maximize a second purchase probability within the 0-12 weeks following a first purchase. This is where all of the magic should happen.

You - the marketer - can fix this problem, and in the process you might just overcome other challenges in your business. Fix it!

At A Higher Level

We've been analyzing this business for several weeks now - let's step up to a 30,000 foot level and see what is going on.

Notice that repurchase rates are under 30% - this is a business that is critically dependent upon new + reactivated buyers for future success.

We can see how items per order decreased / while price per item purchased increased.

Notice that existing buyers purchase less-expensive items than new + reactivated buyers purchase.

Notice that this business came up 1,500 customers shy on keeping new + reactivated buyers moving forward.

This is a business that isn't experiencing big declines - it is a business that has subtle issues and a lack of what I call "file momentum". Look at 12-month buyers ... from 132,370 to 123,042 to 119,530. This business needs about 86,500 new + reactivated buyers to get back on track. This is a marketing challenge, one that marketing can fix. Marketing can "fix it"!!

A Session With Catalog Craig Paperman In A Hotel Lobby

Yes - this is business fiction ... if you don't like business fiction, then how about giving this gem a read (click here)?

Setting: The lobby of a hotel where an omnichannel conference is being held. Catalog Craig Paperman sits with me.

Kevin: Craig, you look frustrated ... like you punctured the flesh covering your hip while sitting on a thumb tack.

"Catalog" Craig Paperman: What is wrong with you?

Kevin: Nothing, why?

Craig: I sat through your talk today. It was an utter abomination.

Kevin: Well I wouldn't go that far.

Craig: I would.

Kevin: Why?

Craig: You know Kevin, I don't agree with everything you say, but sometimes you make interesting points.

Kevin: Sometimes?

Craig: And you peppered the audience today with a slurry of objectionable and provocative statements.

Kevin: Like what?

Craig: You said that omnichannel was dead. Are you obtuse? Ask any vendor, omnichannel is real, and it is spectacular.

Kevin: I didn't say it was dead. I said omnichannel was fraudulent.

Craig: That's worse! You just need to shut up and go away.

Kevin: Can we agree that Macy's is the poster child for omnichannel strategy?

Craig: Maybe. They sure don't match the raw power of a catalog and a website, to be fair.

Kevin: Raw power?

Craig: Send an email on Monday and a catalog on Tuesday and you'll have an order on Wednesday.

Kevin: If that is true, then why was Footsmart purchased for a modest sum and then the catalog was shut down? If your combo was powerful, wouldn't companies be paying a premium for catalogers and then expanding catalog programs?

Craig: I cannot speak for the idiocy of those who buy catalog brands.

Kevin: And there's going to be 8,000 store closures this year. If the omnichannel bricks 'n clicks model worked, we'd be adding 8,000 stores a year because sales would be so plentiful that we'd all be compelled to open more stores.

Craig: You are cherry-picking your outcomes.

Kevin: 8,000 store closures in 2017 is not cherry-picking. It's pretty much the implosion of an entire business model.

Craig: Thanks, Amazon.

Kevin: You are blaming Amazon? You said that omnichannel strategy would defeat single-channel brands. And yet, Amazon is in the process of destroying traditional retail. If anything, you need to take accountability for misleading so many professional members of the catalog and retail community.

Craig: I'm the victim here!

Kevin: Wow.

Craig: Wow is right. You told the audience that omnichannel strategy does not increase customer spend.

Kevin: It doesn't.

Craig: McKinsey proved in 2001 that omnichannel buyers spend 8 times as much as single channel buyers. The whole industry knows this. It is an established fact. Why must you rail against established facts?

Kevin: Because the facts are fraudulent - if customers spent 8x more, then wouldn't every company following an omnichannel thesis be growing at healthy rates?

Craig: You don't argue with facts. In fact, you shared fake news with the audience today.

Kevin: My goodness.

Craig: Seriously. You can't just make up your own facts, that's what some in the vendor community do for us. They lead our thoughts. They're "thought leaders".

Kevin: In the past decade, I have written one million lines of code to analyze hundreds of billions of purchase transactions. I have facts on my side. Lots of facts. Have you written the code and put in the hard work to understand how customers behave?

Craig: That doesn't make me wrong. I have the "right" facts on my side.

Kevin: Describe a fact that is "right".

Craig: I'm not going to go down that road.

Kevin: Why?

Craig: Because you'll just find a fact that refutes what I said. You don't have faith.

Kevin: I have faith in my clients. I have faith in the industry. I don't have faith in an omnichannel agenda pushed by a minority of the vendor community desperate to keep you spending money with them. I'm on your side!

Craig: There you go again.

Kevin: Who makes money in the catalog industry when we mail more catalogs?

Craig: Everybody!

Kevin: Craig, you've cut back on circulation by 44% in the past decade. Why do you cut back on catalog circulation and then demand everybody else mail more often?

Craig: Because my CEO is a lumber-headed moron who prioritizes profit over engagement. And that brings up another point. You said you did a poll on Twitter and 52% of your readers would prefer to have an engaged customer over a customer who spends a hundred dollars right now. Then you lambasted those who took the poll, telling them they need to prioritize sales and profit over engagement. I mean, are you stupid? The majority of people are on my side, the "right" side of the equation. Your poll proved I am right.

Kevin: You prefer engagement over profit?

Craig: Absolutely!

Kevin: Why?

Craig: Because an engaged customer is a profitable customer.

Kevin: Who told you that?

Craig: My paper rep.

Kevin: Oh my goodness.

Craig: And there is no better way to engage a customer than with a catalog.

Kevin: So we should all spend $0.75 per mailing to engage a customer and we should be ok with the fact that the customer doesn't buy something?

Craig: Precisely!

Kevin: How do you make money if the customer doesn't buy something?

Craig: It's not about making money.

Kevin: Who told you that?

Craig: An industry thought leader. Or somebody at a co-op. I don't know.

Kevin: Your co-op rep told you to mail catalogs and not worry about making money because you'll engage the customer?

Craig: I know, that's great advice.

Kevin: If you follow that advice, who makes money?

Craig: Um.

Kevin: Your co-op makes money. Your paper rep makes money. Your printer makes money. Your merge/purge house makes money, your ....

Craig: Enough!

Kevin: Think about this. Your industry partners are telling you to not worry about selling stuff. They tell you to use print to engage your customer, and then you are required to pay them to engage your customer and not make any money. But they're making money. That's what I mean when I say that the omnichannel agenda is fraudulent.

Craig: It's not.

Kevin: It is. Why don't you tell your vendor partners that you'll pay them with engagement points instead of dollars?

Craig: That's stupid. They are providing me with a service, they deserve to be compensated.

Kevin: But they tell you that you do not deserve to be compensated!

Craig: Because engagement will pay off in the long run.

Kevin: Don't pay your co-op and tell them that the engagement will pay off for them in the long run.

Craig: You just don't understand how business works.

Kevin: I think the reason you don't like me is because I am pointing out that I understand how business works, and you're on the wrong end of the business relationship.

Craig: We're done here!

Gross Margin Comps

A business can handle negative top-line comps if gross margin dollars are increasing. Here's the comp segment table for our business.

Gross margin comps look better than top-line sales/demand comps look ... but the last five months demonstrate a 4% - 5% drop in gross margin comps. This business is struggling due to merchandising strategy changes (and marketing problems with new + reactivated buyers - problems independent of merchandising strategy changes).

You are running these simple diagnostics on your business, right?

Product Category Comps

Take a look at comp segment performance for our primary product category.

And this is the table for all other product categories.

You can visually see the change in business strategy five months ago. The Merchandising Team made decisions that resulted in negative business performance, especially among the primary merchandise category responsible for 75% of company sales.

These are simple diagnostics that quickly identify when a business is struggling, outlining why a business is struggling. Run them for your business!

New And Existing Item Productivity

Here's comp segment productivity for existing items.

We can see the dip last year - which coincides with the de-emphasis in existing items - followed by improved productivity this year.

If productivity of existing items improved, then productivity of new items had to have declined, right? Let's take a look.

Oh my goodness, dear readers. Look at what happened in the past five months!

There's the problem.

That's the story for why this business stalled in the past half-year.

Productivity of new items is in the tank - and is REALLY in the tank.

Compare last year to two years ago - look at the gains in new merchandise productivity.

We've applied very simple diagnostics to identify three problems with this business.

1. Existing items were cut back 18-30 months ago, resulting in demand declines.
2. New items were throttled 0-5 months ago, resulting in demand declines.
3. Marketing is not doing a good enough job of identifying new + reactivated buyers.

These are simple diagnostics to run - and they quickly point out what the business problem is and WHEN the business problem began. We can fix our business problems when we know what went wrong and when something went wrong!

Is Customer Productivity Acceptable?

I use the comp segment framework to identify if customer productivity is acceptable or not. As you know from reading this blog over the past four years, I measure 2x buyers in the past year, quantifying what they spend in the next month - and compare the metric to a comparable group of customers from the prior year.

For our business, here's what the comp segment table looks like:

Well look at that!

It turns out that customers are 3% more productive than the prior year, and are 7% more productive than the year before that ... for a total of 10.7% more productive over the past two years.

This tells us that Marketing is not doing their job. If customer productivity is improving and the business is shrinking, then new + reactivated customer counts are likely in decline?

Wanna take a look at new + reactivated customer counts?

There you go!

In the past two years, Marketing is throttling new + reactivated buyers down by 10% - while Merchandising is improving productivity by 11%. Now, it is possible that new + reactivated customers are impacted by more expensive new items, sure. But Marketing is responsible for new + reactivated buyers, it is their job to figure out how to get new + reactivated buyers interested in buying merchandise - especially if existing customers are showing increased productivity.

Marketing Tactics Make A Difference, Too

Yesterday, we figured out that the Merchandising Team discontinued existing items back in 2014, and then stopped the ramp-up of new items in late 2016, making it hard to grow the top-line.

Marketing created some problems as well.

I have three images for your viewing pleasure. Let's start with demand from search, on a rolling twelve-month basis.

This is your classic "we have a budget and the search vendor takes care of things for us" graph, don't you think? The trajectory of the graph hasn't changed for eighteen months.

This is the online channel - after removing the impact of search and email from online sales.

Oh oh.

For two years, demand generated online is in decline. 

When a business is "sick" it is common to see more and more demand (as a share of total) is generated by marketing channels. When a business is "healthy" it is common to see more and more demand (as a share of total) generated without attribution - customers simply love the merchandise and they buy the merchandise.

What does email marketing look like?

By mid-2015, somebody yelled at poor email marketing manager, and she came through with a significant increase in demand.

One might infer that there is a problem with the website ... this is where the digital marketing folks need to apply their craft. Maybe there is something to be fixed/improved. Maybe the lack of existing winning items dissuades customers from buying online. Regardless, the topics can be easily researched, identified, analyzed, and acted upon, right?